How Car Insurance Premiums Are Calculated: The Factors That Matter
To many drivers, how car insurance premiums are calculated by insurance companies are mysterious and confusing.
Premiums are based partly on an insurance company’s estimate of the amount of claims it will have to pay in a year to cover the costs of vehicle repairs and medical rehabilitation for injured people. All drivers are essentially paying into a shared risk pool to cover the cost of those claims.
Let’s take a look at the things insurers consider when determining rates:
Your driving record
Of course, your driving record is a significant factor in determining rates, and it is the one element of your premium you can influence directly. For example, if you have a ticket or an at-fault accident on your record, you will pay a higher rate than you would without it. Conversely, drivers who maintain a good, clean driving record over long periods of time will find their rates are lower.
Your years of experience as a driver also count. New drivers are a higher risk due to having less experience. That means that their rates are higher. The longer you have been driving, the better your rates will be due to your increased experience on the road. Although young drivers tend to have higher rates, remember that new drivers of all ages will be considered a higher risk.
The vehicle you drive
It’s not only you as the driver, but also the car you choose to drive that contributes to your insurance rate. Different cars are rated by insurance companies according to a combination of factors. High-value luxury cars will cost more to insure because they cost more to repair or replace. Sports cars are statistically more likely to be involved in a serious accident, so they too may see higher rates.
Vehicle theft is another issue, and in some parts of the country, it’s on the increase. Annually, auto theft costs Canadians $1 billion. In other words, if your vehicle is more likely to be stolen, it will cost more to insure.
Where you live and commute
Your postal code is another factor that goes into calculating your insurance rate. Some cities have a lot more vehicles per capita than others. Areas with higher incidents of accidents or theft will carry higher rates. Specifics about your home also counts. For instance, if you park in a garage rather than on the street, you may see a lower rate as there’s less of a chance your vehicle will be damaged or stolen.
How far you drive from home to work is part of the calculation as well. Long commutes mean higher rates since you’re spending more time on the road. If you don’t work or work from home, and your car is on the road less frequently, it is at a lower risk of an accident. That may translate into a lower premium.
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Other factors that insurers consider
All insurance rates are basically a calculation of risk, and each driver comes with a unique combination of factors that can raise and lower rates. This means that every driver will have a different rate because their risk level is unique to them.
For example, the more likely it is that you may file a claim results in a higher premium. That premium is based on what the insurer believes it will need to payout in a collision claim to repair your vehicle. Nowadays, modern vehicles are veritable computers on wheels with all the technology they have onboard. Nevertheless, there are things you can do to lower your premium.
The important thing to remember is that each insurance company calculates risk in their own way and places a different amount of importance on each factor. That means you can find a great deal of difference in the insurance quotes you receive.
Other elements insurers may use include:
- Data on distracted driving. It is increasing nationwide, and as it is a significant cause of collisions. It may be among the factors insurers weigh.
- Insurance fraud is a problem which accounts for an estimated 15 cents of every dollar paid in auto premiums.
- Extreme weather such as floods and major storms are increasing across Canada, which is leading to significant catastrophic losses of both homes and vehicles. The Insurance Bureau of Canada estimates insurers paid out $41.5 billion in claims in 2019.
Shopping around for car insurance quotes is the quickest way to discover just how different those rates can be – and how much less you could be paying just for taking the time to get a few quotes.